Have you been following the latest tale of a rouge trader, losing billions on bad bets in the market? A scandal has blown up over the past week at France's largest bank - it's called Societe General, or Soc Gen.

A guy at the bottom of the bank's totem pole - he made a mere $140,000 a year - managed to lose a staggering $7.2 billion by making real and fake trades with derivatives. The finger-pointing on this one will go on for months. Obviously, the bank's internal controls were found wanting, but one thing is clear. This fellow - his name is Jerome Kerviel - was not in it for himself. He didn't try to walk off with $7 billion, Kerviel was just trying to make more money for his employer. So was Nick Leeson when he brought down Barings Bank.

These traders all made an initial bet, and it went against them. Then they tried to cover it up with more trades, and that got them deeper and deeper into trouble.

This sort of thing happens with depressing regularity. The only thing that changes is the amount of money involved - the sums tend to get larger and larger.

Soc Gen may not survive a $7 billion hit. So if I was running a big bank, I'd try to make some change to the culture of the organization.

I'd keep paying traders big money for making profits. That's what they are supposed to do.

But I'd also make sure that everyone knows there is tolerance for that first bet that goes bad. I'd have some sort of booby prize handed out to those who come forward with their errors, so the first mistake was the bank's only mistake.

And I'd do something a little machiavellian: I'd give a big reward to any bank employee who came forward, confidentially, and explained that one of their colleagues was doing something that could translate into big losses. Because on a tight-knit trading floor, colleagues are going to have their suspicions about traders like Jerome Kerveil and Nick Leeson.

The culture and the systems just have to improve. As fun as they are to follow, there's simply no excuse for big banks to play host to rogue traders.

(Click on the comment link below to share your view)

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Comments (2)

Stephen Duthie wrote:
Posted: 2008/02/04 at 1:03 PM

I think you may have the wrong idea.
First, what is sometimes a firm held position, becomes a rogue trade when a scapegoat is needed.
Secondly, all anyone at SocGen or Barings had to do was look at the margin postings. I don't know why no one bothers to report this element.
Regardless of fictitious trades, real trades hidden under desks or computer hacking nonsense - they just needed to follow the cash. Unrealized losses or gains need margin posted against them. SocGen's failure was just as much about not destroying a counter-party relationship than allowing a "rogue" to circumvent the system.
SG only discovered the losses when they thought a counter-party owed them too much money on fictitious trades. They were happy to post SG's margin on the losing side, but just didn't think it somehow appropriate to ask for it from someone else. Why? Whom knows?It's the missing link from operations through to risk management that somehow continually gets over-looked.

Mike Fijne wrote:
Posted: 2008/02/04 at 7:32 PM

Andrew Willis may want to check his facts: before Mr. Kerviel's position was unduly and hastily liquidated by one bank official at the worst time, Mr. Kerviel had a 1.4 billion euro positive position at the end of 2007. On CBC, Mr Willis exceedingly plain language is matched by his simplistic reasoning that he would not dare to offer Globe and Mail readers. Mr Willis is not a bank executive: he is a Globe and Mail reporter who plays dumbing it down for CBC audiences. I surely hope he does not make $140,000 per annum at this little game...

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